Please select your location and client type

Equities: where next after a record breaking year?

Our equities fund managers give their thoughts on what investors should look out for in the coming year.

The outlook for global equities remains reasonably bright, notwithstanding the fact many markets are standing at record highs having risen at breakneck pace in 2017.

Although rising interest rates and bond yields are likely to provide a headwind for share prices, it should be remembered that central banks’ assistance is being withdrawn for a reason, namely stronger economic growth. Since that should feed through into higher profits, it ought to support share prices.

The prospects for European equities seem particularly positive given the rapid improvement in economic performance across the region, and what we perceive to be reduced political risk. The European market is trading on a forward price-to-earnings (P:E) multiple of around 15 (1)which seems far from excessive, all the more so since economic growth within the euro zone may exceed market expectations next year.

European equities fund manager Edward Kevis believes European technology shares continue to look attractive. “Although prices have risen sharply, there is scope for further gains given the ongoing growth of the ‘digital economy’, albeit probably less than 12 months ago,” he says. Kevis also likes industrial stocks, which in many cases seem poised to benefit from the ongoing trend towards rising automation as well as the brighter economic outlook.

While there are risks to this view, especially if the world economy were to suffer an unexpected setback, he sees little merit is attempting to guard against such an eventuality at this point. For instance, he believes there is little relative value in the shares of more defensive companies given the relatively low growth rates most are forecast to achieve.

Elsewhere, the positive economic outlook should also benefit emerging market shares. Although valuations have risen sharply, they remain at a roughly 30 per cent discount to those available in developed markets.(2) That looks excessive, especially given the pace at which corporate earnings growth has outstripped that seen in developed markets.

Emerging market fund manager Will Ballard believes the Taiwanese market, with a forward P:E ratio of 13, looks especially attractive, not least since many of the country’s exporters should benefit from stronger global economic growth. He also likes the Korean market.

“A P:E ratio of around nine looks enticing, especially with the government of President Moon Jae-in starting to tackle corporate corruption by limiting the power of the country’s five main family-run conglomerates,” Ballard says.

However, on a word of caution, it is important to note that the rally in emerging market equities has been driven largely by China, specifically some of its largest technology companies. “Their dominance as a source of returns for emerging markets is of concern,” Ballard says.

The picture is more mixed for the US. Although corporate earnings have been growing strongly, share valuations look high relative to other regions. Nevertheless, US stocks are likely to be supported at the start of the year by the prospect of tax cuts.

On the other hand, sectors such as telecoms and retail remain challenged, Saldanha argues. And if interest rates were to rise faster than expected, highly-levered companies, especially in the small-cap sector, could be vulnerable.

The outlook for UK equities is clouded by the uncertain political climate and economic outlook, although opportunities remain on a selective basis. UK equities fund manager Trevor Green believes shares in the oil majors look attractive given the extent to which balance sheets have been repaired.

“With scrip dividends being converted back to cash dividends, the shares offer attractive yields. The oil price has rallied strongly since the summer and the share prices have materially lagged this move which gives investors an opportunity,” Green says.

He adds the UK has a few world-leading technology companies of varying sizes and some continue to look attractive long-term investments. When investing in consumer-facing businesses key attributes to look out for remain pricing power, growing franchises and an ability to defend gross margins, Green says.

A new pilot scheme could give investors greater access to China’s vast equity market. But the project may also affect the performance of existing Hong Kong-listed shares, says Will Ballard.

Important Information

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at 4th January 2018. This commentary is not an investment recommendation and should not be viewed as such. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

RA17/0026/01042018

Contributors include:

Edward Kevis

Fund Manager, European Equities

Main responsibilities

Ed is the fund manager of Aviva Investors’ European Equity Income funds. His responsibilities include supporting the day to day running of all other European Equity funds run out of London office. Ed’s specialism is in the Support Services sector.

Experience and qualifications

Ed progressed to his current role in 2015 after working as the assistant fund manager for European Equities, and was initially hired as a support services equity analyst for the European and UK Equity team.
Ed began his career with Lloyds Banking Group, initially joining the Business Specialist Scheme with various roles in corporate lending, strategy and risk management in the Wholesale Banking division, and then moving to the Business Support Unit Investments team, initially in the Portfolio team but later moving to a combined transaction and portfolio role.
Ed holds a BA (Hons) in Finance Accounting and Management from the University of Nottingham, and an Applied Diploma in Corporate Banking. He has also passed Level 1 of the IMC and is a CFA charterholder.

Will Ballard

Head of Emerging Markets and Asia Pacific Equities

Main responsibilities

Will is the lead portfolio manager responsible for our Emerging Markets and Asia Pacific equity strategies.

Experience and qualifications

Prior to joining Aviva Investors, Will worked at Royal Bank of Canada in their Global Arbitrage Trading division. Before this, he was a fund manager at Henderson Global Investors on their Pan European Equity Multi-strategy team.
Will holds an MA (Hons) from Cambridge University, He also holds the UKSIP, Investment Management Certificate and is a CFA® charter holder.

Prior to joining Aviva Investors, Richard worked for Punter Southall & Co in an actuarial internship role. Richard holds a Masters in Chemistry from the University of Oxford and the Investment Management Certificate.

Trevor Green

Head of UK Equities

Main responsibilities

Trevor manages institutional and retail UK equity funds.

Experience and qualifications

He previously worked as a fund manager at Henderson Global Investors, where he was co-manager of the Henderson Managed Distribution Fund and provided equity input into the Henderson World Wide Income Fund. Prior to this, Trevor worked at New Star Asset Management and before that spent nearly six years at RCM. He has also worked at Credit Suisse Asset Management and started his career at Capel Cure Myers.
Trevor holds a BA Honours degree from Aberdeen University